ICMF473_Financial Theory_T8_Efficient Capital Markets-Theory and Evidence

1、ICMF473 Financial TheoryTopic 8Efficient Capital Markets:Theory and EvidenceDr. Jiang, Jun icjunmahidol.ac.th Mahidol University Section 1: Efficient Capital Market: TheoryDefining Capital Market EfficiencyLenderBorrowerFundsBorrowing/Lending RateRate of return of Production OpportunitiesRate of ret

2、urn of Production OpportunitiesRate of return on the least profitable project = Borrowing/lending rateAllocationally efficient2Perfect Capital MarketCapital Market Efficiency is much less restrictive than Perfect Capital Market: In an efficient capital market, prices fully and instantaneously reflec

3、t all available relevant information.3Capital Market Efficiencyv We can still have efficient capital market if markets are not frictionlessv There can be imperfect competition in product markets and we still have efficient capital marketsv It is not necessary to have costless information in efficien

4、t capital marketsEfficient capital markets imply operational efficiency as well as asset prices that are allocationally efficient; Capital markets are operationally efficient if intermediaries, who provide the service of channeling funds from savers to investors, do so at the minimum cost that provi

5、des them a fair return for their services4Capital Market EfficiencyFama (1970, 1976)5A Formal Definition of the Value of InformationAn information structure: a message about various events hat may happen6The Relationship between the Value of Information and Efficient Capital MarketsFama (1976): effi

6、cient capital markets are those where the joint distribution of security prices, , given the set of information that the market uses to determine security prices at t-1, is identical to the joint distribution of prices that would exist if all relevant information available at t-1 were used, 7Rational Expectations and Market Efficiency89Rational Expectations and Market Efficiency1011Rational Expectations and Market EfficiencyExample1213Rational Expectations and Market Efficiency14Rational Expectations and Market Efficiency1516Rational Expectations and Market Efficiency17Sect